<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)

[X]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
      For the Quarterly Period Ended June 30, 2005
                                       or
[ ]   Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
      For the Transition Period From _______________ to ________________.

Commission file number 000-25727

                               IKONICS CORPORATION
--------------------------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

                Minnesota                                     41-0730027
      -------------------------------                     -------------------
      (State or other jurisdiction of                      (I.R.S. employer
      incorporation or organization)                      identification no.)

                 4832 Grand Avenue
                 Duluth, Minnesota                                 55807
      ----------------------------------------                   ----------
      (Address of principal executive offices)                   (Zip code)

                                 (218) 628-2217
                        ----------------------------------
                            Issuer's telephone number

                                 Not Applicable
--------------------------------------------------------------------------------
         (Former name, former address and former fiscal year, if changed
                               since last report)

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
      Yes [X] No [ ]

            State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practical date: Common Stock, $.10
par value - 1,935,197 shares outstanding as of August 2, 2005.

            Transitional Small Business Disclosure Format (check one): Yes [ ]
No [X]

<PAGE>

                               IKONICS CORPORATION

                         QUARTERLY REPORT ON FORM 10-QSB

<TABLE>
<CAPTION>
                                                                                PAGE NO.
                                                                                --------
<S>                                                                             <C>
PART I.     FINANCIAL INFORMATION

Item 1.       Financial Statements:

              Balance Sheets
              as of June 30, 2005 (unaudited) and December 31, 2004                3

              Statements of Operations
              for the Three Months and Six Months Ended June 30, 2005
              and 2004 (unaudited)                                                 4

              Statements of Cash Flows
              for the Six Months Ended June 30, 2005 and 2004 (unaudited)          5

              Notes to Financial Statements (unaudited)                            6

Item 2.       Management's Discussion and Analysis
              of Financial Condition and Results of
              Operations                                                           9

Item 3.       Controls and Procedures                                              14

PART II.    OTHER INFORMATION                                                      15

            SIGNATURES                                                             17
</TABLE>

                                        2
<PAGE>

                         PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

IKONICS CORPORATION
BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                   JUNE 30         DECEMBER 31
                                                                                    2005              2004
                                                                                  (UNAUDITED)
<S>                                                                              <C>              <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                     $   2,603,549    $   2,737,460
   Marketable securities                                                                84,395          124,358
   Trade receivables, less allowance for doubtful accounts of
     $70,000 in 2005 and $75,000 in 2004                                             1,906,838        1,642,904
   Inventories                                                                       1,746,123        2,201,282
   Prepaid expenses and other assets                                                    93,991           57,345
   Income taxes receivable                                                              15,423                0
   Deferred income taxes                                                               143,000          143,000
                                                                                 -------------    -------------
           Total current assets                                                      6,593,319        6,906,349
                                                                                 -------------    -------------

PROPERTY, PLANT, AND EQUIPMENT, at cost:
   Land and building                                                                 1,499,418        1,466,898
   Machinery and equipment                                                           2,466,954        2,442,295
   Office equipment                                                                  1,226,591        1,239,811
   Vehicles                                                                            175,406          175,406
                                                                                 -------------    -------------
                                                                                     5,368,369        5,324,410
   Less accumulated depreciation                                                     4,443,933        4,295,580
                                                                                 -------------    -------------
                                                                                       924,436        1,028,830

INTANGIBLE ASSETS, less accumulated amortization of $122,287 in
   2005 and $109,728 in 2004                                                           288,286          292,349

DEFERRED INCOME TAXES                                                                   65,000           65,000

INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES                                        450,790          197,460
                                                                                 -------------    -------------

                                                                                 $   8,321,831    $   8,489,988
                                                                                 =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                              $     138,702    $     536,391
   Accrued compensation                                                                206,790          263,510
   Other accrued expenses                                                              229,933          245,702
   Income taxes payable                                                                  5,876           30,169
                                                                                 -------------    -------------
           Total current liabilities                                                   581,301        1,075,772
                                                                                 -------------    -------------

STOCKHOLDERS' EQUITY:
   Preferred stock, par value $.10 per share; authorized 250,000 shares;
       issued none
   Common stock, par value $.10 per share; authorized 4,750,000
     shares; issued and outstanding 1,934,447 shares in 2005 and 1,930,545
     in 2004                                                                           193,445          193,055
   Additional paid-in capital                                                        1,502,091        1,477,815
   Retained earnings                                                                 6,044,579        5,745,662
   Accumulated other comprehensive income (loss)                                           415           (2,316)
                                                                                 -------------    -------------
         Total stockholders' equity                                                  7,740,530        7,414,216
                                                                                 -------------    -------------
                                                                                 $   8,321,831    $   8,489,988
                                                                                 =============    =============
</TABLE>

See notes to financial statements.

                                        3
<PAGE>

IKONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                   THREE MONTHS                    SIX MONTHS
                                                   ENDED JUNE 30                  ENDED JUNE 30
                                           ----------------------------    ----------------------------
                                              2005            2004              2005          2004
                                           ------------    ------------    ------------    ------------
<S>                                        <C>             <C>             <C>             <C>
NET SALES                                  $  3,741,995    $  3,683,415    $  7,070,522    $  7,066,213

COSTS AND EXPENSES:
   Cost of goods sold                         2,104,290       1,992,264       4,034,934       3,880,344
   Selling, general, and administrative       1,093,224       1,187,869       2,331,378       2,316,325
   Research and development                     160,810         144,210         315,713         294,730
                                           ------------    ------------    ------------    ------------
                                              3,358,324       3,324,343       6,682,025       6,491,399
                                           ------------    ------------    ------------    ------------

INCOME FROM OPERATIONS                          383,671         359,072         388,497         574,814

INTEREST INCOME                                  15,259          11,996          25,199          15,879
                                           ------------    ------------    ------------    ------------

INCOME BEFORE INCOME TAXES                      398,930         371,068         413,696         590,693

INCOME TAX EXPENSE                              123,668          96,655         114,779         155,622
                                           ------------    ------------    ------------    ------------

NET INCOME                                 $    275,262    $    274,413    $    298,917    $    435,071
                                           ============    ============    ============    ============
EARNINGS PER COMMON SHARE:
   Basic                                   $       0.14    $       0.14    $       0.15    $       0.23
                                           ============    ============    ============    ============

   Diluted                                 $       0.14    $       0.14    $       0.15    $       0.22
                                           ============    ============    ============    ============

WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING :
   Basic                                      1,941,696       1,906,869       1,939,450       1,892,504
                                           ============    ============    ============    ============

   Diluted                                    1,964,166       2,016,595       1,964,218       2,004,158
                                           ============    ============    ============    ============
</TABLE>

See notes to financial statements.

                                        4
<PAGE>

IKONICS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                              SIX MONTHS
                                                             ENDED JUNE 30
                                                   -------------------------------
                                                       2005              2004
                                                   -------------     -------------
<S>                                                <C>               <C>
CASH FLOWS FROM OPERATING
     ACTIVITIES:
   Net income                                      $     298,917     $     435,071
   Adjustments to reconcile net income to net
       cash provided by operating activities:
     Depreciation                                        148,353           175,924
     Amortization                                         21,831            14,213
     Tax benefit from stock option exercise               11,451                 -
     Changes in working capital components:
         Trade receivables                              (263,934)         (156,479)
         Inventories                                     455,159          (154,067)
         Prepaid expenses and other assets               (36,646)          (52,108)
         Income taxes receivable                         (15,423)                -
         Accounts payable                               (397,689)          292,202
         Accrued liabilities                             (72,489)           25,425
         Income taxes payable                            (24,293)          (81,330)
                                                   -------------     -------------
           Net cash provided by
              operating activities                       125,237           498,851
                                                   -------------     -------------

CASH FLOWS FROM INVESTING
     ACTIVITIES:
   Purchase of property and equipment                    (43,959)         (168,528)
   Purchase of intangible                                (17,768)           (3,742)
   Purchase of non-marketable equity securities         (253,330)                -
   Proceeds from sales of marketable securities           42,695            76,628
                                                   -------------     -------------
           Net cash used in investing
                 activities                             (272,362)          (95,643)
                                                   -------------     -------------

CASH FLOWS FROM FINANCING
     ACTIVITIES:

   Proceeds from exercise of stock options               128,878           165,736
   Redemption of common stock                           (115,664)                -
                                                   -------------     -------------
              Net cash provided by financing
                  activities                              13,214           165,736
                                                   -------------     -------------

NET INCREASE (DECREASE) IN CASH
   AND CASH EQUIVALENTS                                 (133,911)          568,944

CASH AND CASH EQUIVALENTS AT
   BEGINNING OF PERIOD                                 2,737,460         1,507,794
                                                   -------------     -------------
CASH AND CASH EQUIVALENTS AT
   END OF PERIOD                                   $   2,603,549     $   2,076,738
                                                   =============     =============
SUPPLEMENTAL DISCLOSURES OF
     CASH FLOW INFORMATION:
     Income taxes paid                             $     143,043     $     236,388
                                                   =============     =============
</TABLE>

See notes to financial statements.

                                        5
<PAGE>

                               IKONICS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

                                   (Unaudited)

1.    Basis of Presentation

      The balance sheet of IKONICS Corporation (the "Company") as of June 30,
      2005, and the related statements of operations for the three and six
      months ended June 30, 2005 and 2004, and cash flows for the six months
      ended June 30, 2005 and 2004, have been prepared without being audited.

      In the opinion of management, these statements reflect all adjustments
      (consisting of only normal recurring adjustments) necessary to present
      fairly the financial position of IKONICS Corporation as of June 30, 2005,
      and the results of operations and cash flows for all periods presented.

      Certain information and footnote disclosures normally included in
      financial statements prepared in accordance with accounting principles
      generally accepted in the United States of America, have been condensed or
      omitted. Therefore, these statements should be read in conjunction with
      the financial statements and notes thereto included in the Company's
      Annual Report on Form 10-KSB for the year ended December 31, 2004.

      The results of operations for interim periods are not necessarily
      indicative of results that will be realized for the full fiscal year.

2.    Inventory

      The major components of inventory are as follows:

<TABLE>
<CAPTION>
                          June 30, 2005     Dec 31, 2004
                          -------------     -------------
<S>                       <C>               <C>
Raw materials             $   1,012,497     $   1,260,457
Work-in-progress                251,241           268,419
Finished goods                  901,477         1,019,952
Reduction to LIFO cost         (419,092)         (347,546)
                          -------------     -------------

Total Inventory           $   1,746,123     $   2,201,282
                          =============     =============
</TABLE>

3.    Earnings Per Common Share (EPS)

      Basic EPS is calculated using net income divided by the weighted average
      of common shares outstanding. Diluted EPS is similar to Basic EPS except
      that the weighted average number of common shares outstanding is increased
      to include the number of additional common shares that would have been
      outstanding if the dilutive potential common shares, such as options, had
      been issued.

                                        6
<PAGE>

      Shares used in the calculation of diluted EPS are summarized below:

<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                                                    Jun 30, 2005     Jun 30, 2004
                                                                    -------------    ------------
<S>                                                                 <C>              <C>
Weighted average common shares outstanding                              1,941,696       1,906,869
Dilutive effect of stock options                                           22,470         109,726
                                                                        ---------       ---------
Weighted average common and common equivalent shares outstanding        1,964,166       2,016,595
                                                                        =========       =========
</TABLE>

<TABLE>
<CAPTION>
                                                                          Six Months Ended
                                                                    Jun 30, 2005     Jun 30, 2004
                                                                    ------------     ------------
<S>                                                                 <C>              <C>
Weighted average common shares outstanding                             1,939,450        1,892,504
Dilutive effect of stock options                                          24,768          111,654
                                                                       ---------        ---------
Weighted average common and common equivalent shares outstanding       1,964,218        2,004,158
                                                                       =========        =========
</TABLE>

      Options to purchase 174,975 and 211,918 shares of common stock were
      outstanding as of June 30, 2005 and 2004, respectively.

4.    Stock-Based Compensation Plan

      The Company has a stock-based compensation plan. The Company accounts for
      this plan under the recognition and measurement principles of APB Opinion
      No. 25, Accounting for Stock Issued to Employees, and related
      interpretations. Accordingly, no stock-based employee compensation cost
      has been recognized, as all options granted under this plan had an
      exercise price equal to the market value of the underlying common stock on
      the date of grant. The following table illustrates the effect on net
      income and earnings per common share had compensation cost for the
      stock-based compensation plan been determined based on the grant date fair
      values of awards (the method described in FASB Statement No. 123,
      Accounting for Stock-Based Compensation):

<TABLE>
<CAPTION>
                                                  Three Months Ended                Six Months Ended
                                               June 30,        June 30,         June 30,         June 30,
                                                 2005            2004             2005             2004
                                            -------------    -------------    -------------    -------------
<S>                                         <C>              <C>              <C>              <C>
Net income:

 As reported                                $     275,262    $     274,413    $     298,917    $     435,071

 Deduct total stock-based employee
 compensation expense determined under
 fair value based method for all awards,
 net of tax                                         6,693            5,890           10,607           14,755
                                            -------------    -------------    -------------    -------------
 Pro forma                                  $     268,569    $     268,523    $     288,310    $     420,316
                                            =============    =============    =============    =============

Basic earnings per share:
 As reported                                $        0.14    $        0.14    $        0.15    $        0.23
 Pro forma                                  $        0.14    $        0.14    $        0.15    $        0.22

Diluted earnings per share:
 As reported                                $        0.14    $        0.14    $        0.15    $        0.22
 Pro forma                                  $        0.14    $        0.13    $        0.15    $        0.21
</TABLE>

5.    Intangible Assets

      Intangible assets consist primarily of patents, licenses and covenants not
      to compete. Intangible assets are amortized on a straight-line basis over
      their estimated useful lives or terms of their agreement. Estimated
      amortization expense for each of the next five years is $25,000 annually.
      In connection with license agreements, the Company has agreed to pay
      royalties ranging from 3% to 5% on the future sales of products subject to
      the agreements.

                                        7
<PAGE>

5.    Comprehensive income

      Comprehensive income includes unrealized gains and losses on the Company's
      available for sale marketable securities. Total comprehensive income was
      $275,461 and $275,231 for the three months ended June 30, 2005 and 2004,
      respectively. Total comprehensive income was $301,648 and $439,892 for the
      six months ended June 30, 2005 and 2004, respectively.

                                        8
<PAGE>

                               IKONICS CORPORATION

      The information presented below in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Factors that May
Affect Future Results" below, that could cause actual results to differ
materially from those projected. Because actual results may differ, readers are
cautioned not to place undue reliance on these forward-looking statements.
Certain forward-looking statements are indicated by italics.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      The following management's discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations during the second quarter of 2005, the six months ended June 30, 2005
and the same periods of 2004. It should be read in connection with the Company's
unaudited financial statements and notes thereto included in this Form 10-QSB.

FACTORS THAT MAY AFFECT FUTURE RESULTS

      Certain statements made in this Quarterly Report on Form 10-QSB, including
those summarized below, are forward-looking statements within the meaning of the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties, and actual results may differ.
Factors that could cause actual results to differ include those identified
below.

      -     The Company's belief that the quality of its receivables is high and
            that strong internal controls are in place to maintain proper
            collections--This belief may be impacted by domestic economic
            conditions, by economic, political, regulatory or social conditions
            in foreign markets, or by the failure of the Company to properly
            implement or maintain strong internal controls.

      -     The belief that the Company's current financial resources, cash
            generated from operations and the Company's capacity for debt and/or
            equity financing will be sufficient to fund current and anticipated
            business operations and capital expenditures. The belief that the
            Company's low debt levels and available line of credit make it
            unlikely that a decrease in product demand would impair the
            Company's ability to fund operations--Changes in anticipated
            operating results, credit availability, equity market conditions or
            the Company's debt levels may further enhance or inhibit the
            Company's ability to maintain or raise appropriate levels of cash.

      -     The Company's expectations as to the level and use of planned
            capital expenditures and that capital expenditures will be funded
            with cash generated from operating activities--This expectation may
            be affected by changes in the Company's anticipated capital
            expenditure requirements resulting from unforeseen required
            maintenance or repairs. The funding of planned or unforeseen
            expenditures may also be affected by changes in anticipated
            operating results resulting from decreased sales or increased
            operating expenses or by other unexpected events affecting the
            Company's financial position.

      -     The Company's belief that its vulnerability to foreign currency
            fluctuations and general economic conditions in foreign countries is
            not significant--This belief may be impacted by economic, political
            and social conditions in foreign markets, changes in regulatory and
            competitive conditions, a change in the amount or geographic focus
            of the Company's international sales, or changes in purchase or
            sales terms.

                                        9
<PAGE>

      -     The Company's plans to continue to invest in research and
            development efforts, expedite internal product development and
            invest in technological alliances, as well as the expected focus and
            results of such investments--These plans and expectations may be
            impacted by general market conditions, unanticipated changes in
            expenses or sales, delays in the development of new products,
            technological advances, the ability to find suitable and willing
            technology partners or other changes in competitive or market
            conditions.

      -     The Company's efforts to grow its international business--These
            efforts may be impacted by economic, political and social conditions
            in current and anticipated foreign markets, regulatory conditions in
            such markets, unanticipated changes in expenses or sales, changes in
            competitive conditions or other barriers to entry or expansion.

      -     The Company's belief as to future activities that may be undertaken
            to expand the Company's business--Actual activities undertaken may
            be impacted by general market conditions, competitive conditions in
            the Company's industry, unanticipated changes in the Company's
            financial position or the inability to identify attractive
            acquisition targets or other business opportunities.

CRITICAL ACCOUNTING POLICIES

      The Company prepares its financial statements in conformity with
accounting principles generally accepted in the United States of America.
Therefore, the Company is required to make certain estimates, judgments and
assumptions that the Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The accounting policies,
which IKONICS believes are the most critical to aid in fully understanding and
evaluating its reported financial results, include the following:

      Accounts Receivable. The Company performs ongoing credit evaluations of
its customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness, as determined by review of the current
credit information. The Company monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within expectations
and the provisions established, the Company cannot guarantee that it will
continue to experience the same collection history that has occurred in the
past. The Company's general payment terms are net 30-45 days for domestic
customers and net 60-90 days for foreign customers.

      Inventory. Inventories are valued at the lower of cost or market value
using the last in, first out (LIFO) method. The Company monitors its inventory
for obsolescence and records reductions in cost when required.

      Deferred Tax Assets. At June 30, 2005, the Company had approximately
$208,000 of net deferred tax assets. The net deferred tax assets result
primarily due to timing differences in intangible assets and property and
equipment. The Company has recorded a $46,000 valuation allowance to reserve for
items that will more likely than not be realized. The Company has determined
that it is more likely than not that the remaining net deferred tax assets
reflected on the balance sheet will be realized and that an additional valuation
allowance for such assets is not currently required.

      Revenue Recognition. The Company recognizes revenue on products when title
passes, which is usually upon shipment. Freight billed to customers is included
in sales. Shipping costs are included in cost of goods sold.

                                       10
<PAGE>

RESULTS OF OPERATIONS

QUARTER ENDED JUNE 30, 2005 COMPARED TO QUARTER ENDED JUNE 30, 2004

      Sales. The Company realized 2% sales growth during the second quarter of
2005 with sales of $3.74 million, compared to $3.68 million in sales during the
same period in 2004. Strong domestic sales were partially offset by weaker
international sales. Increased domestic sales resulted from growth in certain
product groups and sales generated by the Company's new product line, IkonSign
Etch. International sales have been slowed by softer European economic
conditions.

      Cost of Goods Sold. Cost of goods sold during the second quarter of 2005
was $2.1 million, or 56.2% of sales, compared to $2.0 million, or 54.1% of
sales, during the same period in 2004. The increase in the cost of sales in the
second quarter of 2005 as a percentage of sales reflects a slightly less
favorable product mix, raw material price increases and increased transportation
costs.

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $1.1 million, or 29.2% of sales, in the
second quarter of 2005, from $1.2 million, or 32.3% of sales, for the same
period in 2004. The 2005 second quarter decrease reflects lower professional
service and promotional expenses.

      Research and Development Expenses. Research and development expenses
during the second quarter of 2005 were $161,000, or 4.3% of sales, versus
$144,000, or 3.9% of sales, for the same period in 2004. The increase is due to
the higher legal and patent related expenses and additional research and
development staff.

      Interest Income. Interest income for the second quarter of 2005 was
$15,000 compared to $12,000 for the same period in 2004. The interest income
increase is due to an increase in interest rates and a larger investment
balance. Interest is earned primarily from government obligation revenue bonds
of various municipalities and school districts.

      Income Taxes. Income taxes were $124,000, or an effective rate of 31%,
during the second quarter of 2004, versus income taxes of $97,000, or an
effective rate of 26%, for the second quarter of 2004. The higher effective tax
rate during the second quarter of 2005 relates to a decrease in the level of tax
benefits from the extraterritorial income exclusion on foreign sales as it
begins to phase out in 2005 and lower foreign sales compared to 2004.

SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004

      Sales. The Company's sales of $7.1 million during the first six months of
2005 were flat as compared to the same period in 2004. Sales growth of 5% in the
domestic market was driven by the new IkonSign Etch product line and certain
product groups. The stronger domestic sales were offset by weaker international
sales. International sales were down 9% from 2004 due to slower economic
activity in Europe and Asian markets.

      Cost of Goods Sold. Cost of goods sold during the first half of 2005 was
$4.0 million, or 57.1% of sales, compared to $3.9 million, or 54.9% of sales,
during the same period in 2004. The increase in the cost of sales in the first
six months of 2005 as a percentage of sales reflects a slightly less favorable
product mix, raw material price increases and increased transportation costs.

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses during the first half of 2005 were $2.3 million, or
32.9% of sales compared to $2.3 million, or 32.8% of sales, for the same period
in 2004. Increased expenses during the first quarter of 2005 related to efforts
to comply with the Sarbanes-Oxley Act and sales and marketing expenses for the
new product lines were offset by lower professional service and promotional
expenses in the second quarter of 2005 as compared to the same period in 2004.

      Research and Development Expenses. Research and development expenses
during the first half of 2005 were $316,000, or 4.5% of sales, versus $295,000,
or 4.2% of sales, for the same period in 2004. The increase is due to additional
research and development staff and higher trial production costs.

                                       11
<PAGE>

      Interest Income. Interest income for the first half of 2005 was $25,000
compared to $16,000 for the same period in 2004. The interest income increase is
due to an increase in interest rates and a larger investment balance. Interest
is earned primarily from government obligation revenue bonds of various
municipalities and school districts.

      Income Taxes. Income taxes were $115,000, or an effective rate of 28%,
during the first half of 2005 compared to $156,000, or an effective rate of 26%,
for the first half of 2004. The higher effective tax rate during the first six
months of 2005 relates to a lower level of tax benefits during that period from
the extraterritorial income exclusion on foreign sales as it begins to phase out
in 2005 and lower foreign sales compared to 2004. The Company did lower its
effective tax rate in 2005 with federal tax credits for research and
development. During the first quarter of 2005, the Company performed a study of
its research and development activities resulting in tax credits totaling
$15,000. The tax credits resulted in a net income tax benefit during the period
of $9,000.

LIQUIDITY AND CAPITAL RESOURCES

      The Company has financed its operations principally with funds generated
from operations. These funds have been sufficient to cover the Company's normal
operating expenditures, annual capital requirements, and research and
development expenditures.

      Cash and cash equivalents were $2,604,000 and $2,077,000 at June 30, 2005
and 2004, respectively. The Company generated $125,000 in cash from operating
activities during the six months ended June 30, 2005, compared to generating
$499,000 in cash from operating activities during the six month period ending
June 30, 2004. The decrease in cash provided by operating activities is
primarily due to lower net income and unfavorable changes in working capital
components. Cash provided by operating activities is primarily the result of
adjusting net income for depreciation, amortization, other similar non-cash
charges, and certain changes in working capital components.

      During the first six months of 2005, trade receivables increased by
$264,000. The increase in receivables was driven by higher domestic sales during
the later part of the second quarter. The Company believes that the quality of
its receivables is high and that strong internal controls are in place to
maintain proper collections. Inventory levels decreased $455,000 due to
decreased raw materials and finished goods for the Company's Accuart and
Accublack products. Prepaid expenses and other assets increased $37,000
reflecting the timing of annual insurance premiums. Accounts payable decreased
$398,000, reflecting timing of payments for inventory to suppliers. Accrued
expenses decreased $72,000 due to the timing of compensation payments. Income
taxes payable decreased $24,000 due to the payment of 2004 taxes during the
first half of 2005.

      The Company used $272,000 and $96,000, in cash for investing activities
during the six months ended June 30, 2005 and 2004, respectively. During the
first six months of 2005, the Company invested $253,000 in Imaging Technology
International ("iTi") to acquire 36,496 shares and warrants to purchase an
additional 33,333 shares of iTi. iTi is a leader in the development of
industrial production systems based on ink jet technology and the Company
believes iTi's expertise fits strategically with the Company's expertise in
developing substrates for a wide variety of industrial printing processes. The
Company also purchased $44,000 in plant equipment upgrades to improve efficiency
and safety, reduce operating costs, and update facilities. The Company also
incurred $18,000 in patent application costs that it records as an asset and
amortizes upon successful completion of the application process. The Company
received $43,000 during the first six months of 2005 from the sale of marketable
securities. During the first six months of 2004, the Company purchased $169,000
in capital equipment and incurred $4,000 in patent application costs. The
Company also received $77,000 from the sale of marketable securities during the
first half of 2004.

      The Company realized $13,000 in cash from financing activities during the
first of half of 2005 compared to $166,000 received in the first half of 2004.
During the first six months of 2005, the Company received $129,000 for the
issuance of 29,401 shares of common stock issued upon the exercise of stock
options compared to $166,000 received during the first six months of 2004 for
42,052 shares of common stock issued upon the exercise of stock options. The
Company repurchased 25,499 shares of common stock at a cost of $116,000 during
the first half of 2005.

                                       12
<PAGE>

      A bank line of credit exists providing for borrowings of up to $1,250,000.
Outstanding debt under this line of credit is collateralized by accounts
receivable and inventory and bears interest at 2.00 percentage points over the
30-day LIBOR rate. The Company did not utilize this line of credit during the
quarter ended June 30, 2005 and there was no debt outstanding under this line as
of June 30, 2005. The line of credit was also not utilized during 2004 and there
were no borrowings outstanding under this line as of June 30, 2004.

      The Company believes that current financial resources, its line of credit,
cash generated from operations and the Company's capacity for debt and/or equity
financing will be sufficient to fund current and anticipated business
operations. The Company also believes that its low debt levels and available
line of credit make it unlikely that a decrease in demand for the Company's
products would impair the Company's ability to fund operations.

CAPITAL EXPENDITURES

      As discussed above, during the six months ended June 30, 2005, the Company
spent $44,000 on capital expenditures. This spending consisted of plant
equipment upgrades to improve efficiency and safety, reduce operating costs, and
update facilities.

      Plans for additional capital expenditures of approximately $100,000 during
the remainder of 2005 include ongoing manufacturing equipment upgrades,
development equipment to modernize the capabilities and processes of the
Company's research and development laboratory to improve measurement and quality
control. Total 2005 planned expenditures are expected to be less than 2004
capital expenditures and are expected to be funded with cash generated from
operating activities.

INTERNATIONAL ACTIVITY

      The Company markets its products to customers in approximately 83
countries in North America, Europe, Latin America, Asia and other parts of the
world. Foreign sales were approximately 30% of total sales for the three months
ended June 30, 2005 and 33% of total sales for the three months ended June 30,
2004. Sales to foreign markets were 30% for the six months ended June 30, 2005
and 33% for the same period in 2004. Foreign sales in 2005 reflect lower
European sales due to weaker economic conditions and weaker sales in certain
Asian countries. Fluctuations of certain foreign currencies have not
significantly impacted the Company's operations because the Company's foreign
sales are not concentrated in any one region of the world and are made primarily
in dollars and Euros. The Company believes its vulnerability to uncertainties
due to foreign currency fluctuations and general economic conditions in foreign
countries is not significant.

      Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars or Euros. IKONICS has not implemented a
hedging strategy to reduce the risk of foreign currency translation exposures,
which management does not believe to be significant based on the scope and
geographic diversity of the Company's foreign operations as of June 30, 2005.

FUTURE OUTLOOK

      IKONICS has invested on average over 4% of its sales dollars for the past
several years in research and development. The Company plans to maintain its
efforts in this area and expedite internal product development as well as form
technological alliances with outside experts to ensure commercialization of new
product opportunities.

      In addition to its traditional emphasis on domestic markets, the Company
will continue efforts to grow its business internationally by attempting to
develop new markets and expanding market share where it has already established
a presence.

      Other future activities undertaken to expand the Company's business may
include acquisitions, building expansion and additions, equipment additions, new
product development and pursuit of marketing opportunities.

                                       13
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

      In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based
Payment" (SFAS 123R). SFAS 123R replaces FASB Statement No. 123 "Accounting for
Stock-Based Compensation", and supersedes APB Opinion No. 25 "Accounting for
Stock Issued to Employees." The statement establishes standards for accounting
for share-based payment transactions. Share-based payment transactions are those
in which an entity exchanges its equity instruments for goods or services, or in
which an entity incurs liabilities in exchange for goods or services, that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS 123R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. SFAS 123R requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments based on the fair value of the award on the grant date (with limited
exceptions). That cost will be recognized in the entity's financial statements
over the period during which the employee is required to provide services in
exchange for the award. The statement will be effective for the Company's first
quarter of 2006. SFAS 123R allows two methods for determining the effects of the
transition. The Company has not yet completed its study of the transition
methods, made any decisions about how it will adopt SFAS 123R, or determined
what option-pricing model is most appropriate for future awards.

ITEM 3. CONTROLS AND PROCEDURES

      As of the end of the period covered by this report, the Company conducted
an evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
control and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.

      There was no change in the Company's internal control over financial
reporting identified in connection with the evaluation required by Rule
13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

                                       14
<PAGE>

                           PART II. OTHER INFORMATION

ITEM  1.    LEGAL PROCEEDINGS

            None

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES (1)

<TABLE>
<CAPTION>
                                                                                      (c) TOTAL NUMBER OF   (d) MAXIMUM NUMBER OF
                                                                                      SHARES PURCHASED AS      SHARES THAT MAY
                                                                                        PART OF PUBLICLY    YET BE PURCHASED UNDER
                                            (a) TOTAL NUMBER OF   (b) AVERAGE PRICE   ANNOUNCED PLANS          THE PLANS OR
                                             SHARES PURCHASED       PAID PER SHARE      OR PROGRAMS              PROGRAMS
                                            -------------------   -----------------   -------------------   ----------------------
<S>                                         <C>                   <C>                 <C>                   <C>
April 1, 2005 through April 30, 2005....          10,000             $     4.60             10,000                   65,506
May 1, 2005 through May 31, 2005........          10,299             $     4.44             10,299                   55,207
June 1, 2005 through June 30, 2005......           5,200             $     4.60              5,200                   50,007
                                                  ------                                    ------
                                                  25,499             $     4.54             25,499
                                                  ======                                    ======
</TABLE>

---------------
(1)   In February 2005, the Company's Board of Directors renewed its approval of
      a stock repurchase program originally approved June 15, 2000 for the
      purchase of 75,000 shares of common stock and November 28, 2001 for the
      purchase of an additional 75,000 shares of common stock. At the time of
      the renewal, a total of 74,494 shares of common stock had been purchased
      under this program. The repurchase program allows the Company from time to
      time to purchase up to an aggregate of 150,000 shares of the Company's
      common stock in the open market or through negotiated transactions.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

            Not applicable

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      The Company's Annual Meeting was held on April 28, 2005. The shareholders
took the following actions:

      The shareholders elected six directors to hold office until the next
annual meeting of shareholders. The shareholders present in person or by proxy
cast the following numbers of votes in connection with the election of
directors, resulting in the election of all nominees:

<TABLE>
<CAPTION>
                                     Votes For       Votes Withheld
                                     ---------       --------------
<S>                                  <C>             <C>
Charles H. Andresen                  1,753,547           12,350
David O. Harris                      1,759,622            6,275
Gerald W. Simonson                   1,759,622            6,275
William C. Ulland                    1,747,782           18,115
Rondi Erickson                       1,753,547           12,350
H. Leigh Severance                   1,758,922            6,978
</TABLE>

      The shareholders elected to ratify the selection of McGladrey & Pullen,
LLP as IKONICS Corporation's independent registered public accounting firm for
the year ending December 31, 2005. The shareholders present in person or by
proxy cast the following numbers of votes in connection with the ratification of
McGladrey & Pullen, LLP.

                                       15
<PAGE>

<TABLE>
<CAPTION>
                                             Broker
Votes For     Votes Against     Abstain     Non-Votes
---------     -------------     -------     ---------
<S>           <C>               <C>         <C>
1,762,997           0            2,900          0
</TABLE>

ITEM 5.     OTHER INFORMATION

            None

ITEM 6.     EXHIBITS

      The following exhibits are filed as part of this Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 2005:

Exhibit                          Description

3.1         Restated Articles of Incorporation of Company, as amended.(1)

3.2         By-Laws of the Company, as amended.(1)

31.1        Rule 13a-14(a)/15d-14(a) Certifications of CEO

31.2        Rule 13a-14(a)/15d-14(a) Certifications of CFO

32          Section 1350 Certifications

      Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.

------------------
(1)   Incorporated by reference to the like numbered Exhibit to the Company's
      Registration Statement on Form 10-SB (File No. 000-25727).

                                       16
<PAGE>

                               IKONICS CORPORATION

                                   SIGNATURES

      In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                          IKONICS CORPORATION

DATE: August 10, 2005                     By: /s/ Jon Gerlach
                                             ----------------------------------
                                             Jon Gerlach,
                                               Chief Financial Officer, and
                                               Vice President of Finance

                                       17
<PAGE>

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit                                  Description                                     Page
-------                                  -----------                                     ----
<S>         <C>                                                                   <C>
3.1         Restated Articles of Incorporation of Company, as amended...........  Incorporated by reference

3.2         By-Laws of the Company, as amended..................................  Incorporated by reference

31.1        Rule 13a-14(a)/15d-14(a) Certifications of CEO......................  Filed Electronically

31.2        Rule 13a-14(a)/15d-14(a) Certifications of CFO......................  Filed Electronically

32          Section 1350 Certifications.........................................  Filed Electronically
</TABLE>